U of M study sees signs of mortgage redlining in Twin Cities

JOEL KOYAMA &#x2022; jkoyama@startribune.comRuby Brown, a North Side resident who nearly lost her Minneapolis duplex when she was trying to refinance, asked: “Why are people having to go through this?”

Minority residents in the Twin Cities are much more likely than white people of similar incomes to be rejected for a mortgage, whether they’re buying a home or refinancing.

If the home sits in a diverse or mainly nonwhite neighborhood, the application is also more likely to get the boot.

Those are the findings of a new study from the University of Minnesota Law School suggesting that mortgage redlining remains alive and well in the Twin Cities. The report suggests that while banks may have justifiably tightened up credit standards, they have swung so far that they are cutting off credit not just to questionable borrowers but to people whose income would appear to qualify them for a loan.

Myron Orfield, the study’s author and head of the law school’s Institute on Metropolitan Opportunity, said the findings surprised him, given the economy’s improvement and the scrutiny mortgage lending and foreclosure practices have received since the real estate collapse.

“The market is really not functioning. These neighborhoods are getting poorer and more abandoned,” Orfield said. “North Minneapolis has never been as devastated as it is today. Ever. Not even in the 1960s.”

The study, using data from 2009 to 2012, focused more on general patterns than on particular bank activity. But it notes that Wells Fargo & Co. and U.S. Bank, the two largest banks in Minnesota, would have made an additional 4,200 and 1,200 mortgage loans, respectively, in racially diverse and mostly nonwhite Twin Cities neighborhoods during that period if they had distributed their loans proportionally to the distribution of homeowners with various incomes across the region.

Both lenders countered the findings, pointing out products and programs they have developed to encourage minority homeownership.

Wells Fargo, for instance, in January lowered the minimum credit score on FHA-backed purchase loans from 640 to 600. U.S. Bank has American Dream and American Dream Rehabilitation loans featuring flexible qualifying guidelines.

“In all cases, borrowers are judged solely and consistently on financial criteria and not on race,” said U.S. Bank spokeswoman Nicole Garrison-Sprenger. “Qualified borrowers are receiving loans.”

Wells Fargo Home Mortgage spokesman Tom Goyda questioned the numbers, noting that they exclude government or FHA-backed mortgages which make up about one-fifth of the Twin Cities’ mortgage market. And he said the study doesn’t address many key factors besides income that go into a credit decision, such as a borrower’s credit score and how much debt they have.

Wells Fargo is the Twin Cities’ single largest lender to minority borrowers and in diverse and minority communities, he said. “Our lending is certainly consistent with the market,” Goyda said.

In redlining, financial companies lend based not on qualifications and creditworthiness but on characteristics of a neighborhood. The Fair Housing Act of 1968 and the Equal Credit Opportunity Act make redlining illegal.

Using available information, the institute found that denial rates for loans to buy homes located in predominantly nonwhite neighborhoods were twice as high as for homes in predominately white areas. The rejection rates for refinancing were similar.

Fewer banks per capita

Overall, the majority nonwhite neighborhoods got 40 percent fewer home purchase loans than they should have gotten based on the income of residents, and 62 percent fewer refinance loans than they deserved, Orfield said.

Camden, Near North and Phillips fared the worst. Lenders rejected more than half of all mortgage applications involving Near North during the four-year period, for instance.

One reason for the disparities, the study said, is that commercial banks simply aren’t pursuing the business as aggressively in certain neighborhoods. The Twin Cities ranks last on a ranking of the country’s largest 25 metro areas for per capita bank branches in census tracts that are mainly nonwhite, with one branch for every 13,473 people. San Francisco, at No. 1, had a branch for every 3,662 people in mainly nonwhite areas.

Lenders are also processing the loans differently, it said. Between 2009 and 2012 black applicants were rejected at significantly higher rates than white applicants: Half of black applicants were rejected, 45 percent of Hispanic applicants were rejected and 37 percent of Asians were rejected. By contrast, 29 percent of whites were rejected.

A coalition of community groups is presenting the findings Thursday at a noon news conference on the steps of Minneapolis City Hall.

“We expect the city of Minneapolis to take decisive steps to hold these financial institutions accountable, to ensure that our community is not a playground for corporate greed,” said Anthony Newby, an activist with Neighborhoods Organizing for Change.

North Minneapolis homeowner Ruby Brown is among those seeking change. Brown, longtime owner of Remedy Hair Design, got caught in a toxic adjustable-rate home loan through someone at her church. She narrowly escaped losing her weathered brick-and-stucco duplex in Willard-Hay, while she struggled to refinance the loan with Bank of America.

“I never actually got a letter saying that I was rejected. What I kept getting was the rejection of runarounds,” Brown said. “This went on forever.”

She finally got the refinance, but it took a national campaign by Neighborhoods Organizing for Change and Occupy Homes Minnesota. “Why are people having to go through this?” asked Brown.

Julie Gugin, head of the Minnesota Homeownership Center in St. Paul, said the center has studied the reasons for the racial gaps in homeownership in Minnesota. A variety of factors contribute to it, she said, but the center did not look at lending patterns, she said.

David McGee, executive director of Build Wealth, MN Inc., a Northside nonprofit that counsels families on homeownership, said discrimination is tough to prove. He has been involved with loans that took much longer to process and close than they should.

Overt discrimination isn’t really necessary, given some of the stiff credit restraints put in place since the crash, McGee said. The general increase in the credit scores required can create enough of a barrier for communities of color on its own, he said.

McGee said his group supports a bill in the Legislature that would help create a loan pool to encourage minorities to apply for a mortgage. “How about we find an antidote?” McGee said.